Contributor: LSEG Academy
There is something funny going on in the world of investing and it’s coming to a place near you – it’s called ESG investing, and it’s in your best interests to know what it means. Traditionally, investors and professional fund managers were driven by the mantra of shareholder capitalism which emphasized the importance of profits. That is, the sole purpose for the existence of a corporation was to generate as much profits as possible for the benefit of the corporation’s shareholders. Nothing wrong with that, you might conclude. Companies grow, they generate profits, they attract investors who benefit from a rising share price and attractive dividend payments.
What we are witnessing today in the world of investing is nothing short of revolutionary and it is based around the concept of ‘stakeholder capitalism’, which means that the shareholder is no longer the only constituency that needs to be kept happy. In other words, the shareholder is no longer king of the castle. This means that corporations are being obliged to take a broader view of their role in society by giving due regard and attention to their customers, employees, suppliers and the wider communities within which they operate – that is, a wider group of stakeholders.
In a recent interview in the New York Times, the CEO of BlackRock, Larry Fink, said :
“In today’s world, a greater sense of responsibility from business is not going to undermine free markets, as Friedman suggests, but is actually essential to preserving and strengthening them……………that’s not just my personal view, it’s what BlackRock’s clients are telling us”
This is important because BlackRock is the largest and arguably the most influential institutional investor in the world. This notion that businesses and corporations have a greater sense of social responsibility is at the very heart of the term ESG investing – environmental, social and governance. So ESG investing is concerned about issues like climate change and pollution levels, social inequalities and gender and racial discrimination, and the way that companies pay their executives and treat their workforce.
All the evidence suggests that you can ‘do well and do good’ at the same time with ESG investing. What better way to make the world a better place
for everyone to live in.
Of course, there are many different approaches to ESG investing that investors can adopt. Some investors want to avoid certain sectors and industries on ethical or moral grounds and would want their fund manager to screen out specific industries and companies, this is referred to as exclusionary or negative screening. Another investor may wish their investments to have some type of a direct impact on society, so may choose to adopt impact investing. It is also possible to have your monies invested via a best-in-class approach whereby the fund manager chooses the very best companies in each industry based on certain criteria.
ESG investing is also extending beyond equities and it is now possible to adopt an ESG approach in a broader range of asset classes, including bonds, real estate, infrastructure and hedge funds. The last couple of years have witnessed a huge growth in the amount of green and sustainable bonds being launched which are used to fund green projects and counter the impact of climate change.
Therefore, whatever way you wish to integrate ESG investing into your portfolio, you can rest assured that there is an approach that suits your objectives and your budget.
Should you wish to discover more, you can register to our LSEG Academy course…